U.S. manufacturing sector slowing as economy loses steam

WASHINGTON (Reuters) - U.S. manufacturing output fell for a second straight month in February and factory activity in New York state hit nearly a two-year low this month, offering further evidence of a sharp slowdown in economic growth early in the first quarter.

The reports on Friday extended the streak of weak data and underscored the Federal Reserve’s “patient” stance towards further interest rate increases this year. Fed officials are scheduled to meet next Tuesday and Wednesday to assess the economy and deliberate on the future course of monetary policy. The U.S. central bank raised rates four times last year.

“The economy is spinning its wheels and not gaining any traction yet in this soft patch produced by trade wars and stock market turbulence and the government shutdown,” said Chris Rupkey, chief economist at MUFG in New York.

“Thank God Fed officials were smart enough to take their foot off the rate hikes accelerator.”

The Fed said manufacturing production dropped 0.4 percent last month, held down by declines in the output of motor vehicles, machinery and furniture. Data for January was revised up to show output at factories falling 0.5 percent instead of slumping 0.9 percent as previously reported.

It was the first back-to-back decline since mid-2017.

Economists polled by Reuters had forecast manufacturing output rising 0.3 percent in February. Production at factories increased 1.0 percent in February from a year ago. Manufacturing accounts for about 12 percent of the economy.

February’s drop in manufacturing production added to soft reports ranging from retail sales to housing in suggesting the economy lost significant momentum early in the first quarter.

The Atlanta Fed is forecasting gross domestic product will rise at a 0.4 percent annualized rate in the first quarter. GDP grew at a 2.6 percent pace in the fourth quarter.

The economy is losing steam as the stimulus from last year’s $1.5 trillion tax cut package fades. Activity is also being crimped by a trade war between the United States and China as well as by last year’s surge in the dollar and softening global economic growth, which are hurting exports.

These factors, together with a 35-day partial shutdown of the U.S. government that ended on Jan. 25, have spilled over to the manufacturing sector.

In a separate report on Friday, the New York Fed said its general business conditions index fell 5.1 points to a reading of 3.7 in February, the lowest since May 2017. It was the third consecutive monthly reading below 10, which the New York Fed said suggested “that growth has remained quite a bit slower so far this year than it was for most of 2018.”

A reading above zero indicates expansion in the region’s manufacturing sector. The survey’s new orders index fell 4.5 points to 3.0 in March. The weakness reported by the New York Fed also suggests that national factory activity remained sluggish this month after slowing sharply in February.

The Institute for Supply Management (ISM) reported this month that its measure of national manufacturing activity dropped to more than a two-year low in February, with a steep decline in the new orders component.

The dollar was weaker against a basket of currencies on Friday, while U.S. Treasury prices rose. Stocks on Wall Street were trading higher.

JOB OPENINGS RISE

But there was some good economic news.

In a third report on Friday, the University of Michigan said its consumer sentiment index rose to a reading of 97.8 in early March from 93.8 in February. Strong consumer sentiment bodes well for consumer spending in the months ahead after spending appeared to have retrenched early in the first quarter.

A fourth report from the Labor Department showed job openings, a measure of labor demand, rose by 102,000 to a seasonally adjusted 7.58 million in January. That was not far from the record high 7.63 million in November.

The high level of vacancies suggests a shortage of workers that could further boost wage growth. Annual wage growth in February was the best since 2009. But the scarcity of workers could be another constrain for manufacturing and economy.

“In addition to trade, risks to manufacturing stem from the labor market, as the scarce supply of workers will also limit growth,” said Stephen Ciccarella, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “We expect this headwind to intensify over the next few quarters as the labor market continues to tighten.”

The drop in manufacturing output last month was offset by gains in utilities and mining, leading to a 0.1 percent rise in industrial production. In January, industrial output fell 0.4 percent.

Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, fell to a nine-month low of 75.4 percent in February from 75.8 percent in January.

Overall capacity use for the industrial sector dipped to 78.2 percent from 78.3 percent in January, keeping inflation in check. Officials at the Fed tend to look at capacity use measures for signals of how much “slack” remains in the economy — how far growth has room to run before it becomes inflationary.